The Oil Industry Will Never Be the Same

We are now nearly a month into the U.S.-Israeli war on Iran. The conflict has lasted much longer than some energy experts initially expected — and it has built up an unprecedented crisis that is set to cascade from Asia to the rest of the world.

On this episode of Shift Key, Rob chats in Houston with Karim Fawaz, an oil and refineries expert and a director in the energy and natural resources group at S&P Global Energy.

Rob and Karim discuss whether the world is already locked into an energy crisis — even if Trump ends the war now. They also talk about why jet fuel has been particularly hard hit and how this crisis could reshape the long-term trajectory of the energy industry — and even of climate change itself.

This episode was recorded on the sidelines of CERAWeek by S&P Global, the big annual energy conference in Houston, Texas. Shift Key is hosted by Robinson Meyer, the founding executive editor of Heatmap News.

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Here is an excerpt from their conversation:

Robinson Meyer: I was late getting into Houston. My first Uber drive in a long time — I mean, here I am, I’m committing the journalistic flub of citing my cab driver, right? — brought up gas prices totally out of nowhere. She was like, I’m gonna do an extra few rides today because I have to buy gas tomorrow.

Karim Fawaz: I mean, it’s starting. It’s starting, but it’s not unheard of. I mean, we’ve lived at $4.55 gas in the past. We’ve seen it. It’s not uncharted territory. And if you want to argue, really, the inflation argument as a percentage of disposable income, it’s less than it was last time we were higher. And the other perspective on it is if you look at crude prices, benchmark crude prices, whether it’s dated Brent or even WTI, you’re at $95, $100 a barrel. So it’s not as alarming.

Now, if you look at what’s happening in Asia, and if you look at assessed prices of crude as of yesterday or two days ago, we’re trading in the $170, $180 a barrel. Jet fuel was trading above $200 a barrel. So you’re talking about a different order of magnitude in terms of the assessed physical prices. So the physical market is telling you there is acute distress. And the locus of that is Asia. And the reason why Asia is so hard hit is because the Middle East to Asia was one of the oil market’s core trunk lines that has been ruptured.

And basically what’s happening is — and I mentioned the China export cuts before — you’ve had these compounding factors, too. So you have a threefold kind of tightening in Asia. The first is the direct impact, flows are cut, you’re not getting products into the system. The second is refineries in Asia that are reliant on crude coming from the Middle East don’t get the feedstock they need to be able to produce refined products in the region. Those have to cut runs. That’s the second impact. The third is China’s becoming more protectionist. Basically, you cut those export flows. South Korea is reducing export flows, as well. And you have this kind of threefold crisis where a lot of markets now suddenly face real physical shortages. You saw news in Australia yesterday — a lot of markets that are net importing, highly vulnerable, start to become kind of invisible.

And how it feeds back into the U.S. — how it feeds back into the Atlantic basin as we call it, so the U.S. and Europe — is you’re creating what is these massive arbitrage windows, which are: Asia starts to become a sinkhole, which is going to absorb every spare barrel available in the global system because of the severity of the crisis there. And you’ve started to see it. You’re seeing cargoes going from the U.S. Gulf Coast to Japan via Panama. You’re seeing flows that, what I call unnatural flows, kind of come into the picture because you have this breakdown, basically. And ultimately, this is kind of about the fungibility of the oil system. It’s still a free-traded market. and you can’t have one market be in acute distress and other markets be insulated unless you have trade protectionism start to come in.

You can find a full transcript of the episode here.

Mentioned:

Previously on Shift Key: Why the Iran War Is a Warning for Natural Gas

Also on Heatmap: The Energy Supply Shock of the Iran War Changes Everything

This episode of Shift Key is sponsored by …

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Music for Shift Key is by Adam Kromelow.